Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, July 2, 2010

Will "Austerity" Doom Us? Or Is It a Plot By Bond Buysers?

Paul Krugman is a guy on a mission, and when he writes all of his columns and blogs on a single theme -- "Austerity" is Bad, Really Bad -- then one can tell he is serious about his message. His column today falls into that category (again), but now he also presents the problem as being caused both by ignorance (not agreeing with Krugman is being ignorant) and A Sinister Plot By Bond Buyers To Destroy The World.

Riding in on his steed, Krugman declares:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

But the 2008 Nobel Laureate has declared that the USA can and should continue on its spree of borrowing, printing money, and spending. (Thus, we can pretend we prosperous and rich even when we are broke, since printing money creates wealth, according to this Keynesian acolyte.)

Krugman's poster child for "austerity" is Ireland, which according to him is in the Very Throes of Permanent Destruction:

And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk.

However, according to Financial Times, Ireland is not doing as badly as Krugman claims, and seems to be moving in the right direction:

Ireland climbed out of recession on Wednesday with the economy returning to growth in the first quarter, after suffering one of the deepest downturns of any advanced industrialised economy.

Ireland’s return to growth, in spite of having undertaken a huge fiscal retrenchment over the past two years which prolonged the downturn, will provide encouragement to other European economies facing up to tackling rising public deficits.

Paul Krugman, the Nobel-laureate economist, argued last week that Ireland had seen little reward for its brave fiscal measures. “Virtuous, suffering Ireland is gaining nothing,” he wrote in the New York Times. He was referring to the reaction in the bond markets, where Ireland is still paying 3 per cent more than Germany to finance its budget. But Irish ministers argue they had little choice but to tackle the deficit.

“Had we not done so, the deficit would have ballooned towards 20 per cent of GDP – a level at which the very financial survival of this country would have been at risk,” Mr Lenihan said at the time of the December budget.

Ireland has slashed public sector salaries by about 15 per cent. Welfare has been cut, including 10 per cent off child benefit. New income and health levies have also been imposed.

The return to growth reflects a buoyant performance by the export sector, particularly the foreign-owned multinationals, who have benefited from the euro’s decline and from Ireland’s falling cost base. Ireland sells close to 60 per cent of its exports outside the eurozone – to the UK, US and other economies.

Now, FT is not claiming that Happy Days Are Here Again on the Emerald Isle, but it is clear that after chasing the same housing bubble as much of the rest of the world, Ireland is putting its house in order, unlike the USA. Krugman's entire analysis depends upon the notion that governments should spend and spend until the economies "recover," but with government continuing to prop up malinvestments and discouraging private investment in healthy sectors due to what economist Robert Higgs calls "regime uncertainty," there is not going to be a recovery in the private sector, period.

In Keynesian analysis, the "end game" is the magical recovery of the private sector. Yet, FDR's New Deal (which Krugman generally praises) clearly did not bring recovery, and it created a huge regime uncertainty. However, given the Obama administration's attacks upon productive people and its attempts to force high-cost, low-output things like "green jobs" upon us, not to mention Obama's own anti-entrepreneurial rhetoric, government spending is likely to be the only game in town.

It won't bring recovery, but it does permit people like Krugman to claim that the state really is our savior when, in reality, it is anything but.

18 comments:

Tim
said...

I might be missing something big, but if the general idea of Krugman that spending is the way to create prosperity and keep Americans going through this rough time, why not just give each American 10,000 dollars, or a certain amount that "qualify?" Isn't this more a direct way to "get money in the hands of people?" Why not raise the minimum wage to 100 dollars an hour? I guess because these things directly point out the flaws in their argument? Someone please enlighten me.

You've answered you own questions, Tim. These point out the flaws in Krugman's thinking.

Minimum wage laws are based on some arbitrary definition of poverty and a "living" wage. I have a MS in mechanical engineering and my labor is not worth $100 per hour. If the minimum wage was raised to $100 anyone whose labor wasn't worth $100 (myself included) would be unemployed.

Unfortunately those people whose labor is worth less than the minimum wage will be chronically poor and jobless unless they can acquire the skills that elevate their labor above the minimum wage. And those who are willing to work for less than minimum wage in order to gain experience and skills are legally prohibited from doing so.

Krugman would rely on the fallacious paradox of thrift to argue against giving $10,000 away. In a recession the prudent thing to do with a $10000 windfall is to save it or pay off debts both are reasonable but do not stimulate spending.

Of course, Austrians realize that saving leads capital creation leads to productivity increases leads to prosperity. Before capital can be created, one must underconsume and set aside resources to invest in capital. (i.e. you can print as many dollars as you want, but you can't print steel to build a factory).

One item that must be noted is that Dr. Krugman has an "all or nothing" attitude. Japan did not attain a recovery because they were just one dollar short of the amount that would have created escape velocity.

Also he feels that the United States must borrow furiously until we get to the point where that magic dollar will make those other tens of trillions of dollars have an effect.

And also I would like to note that in Krugman's world, debt always has a positive effect on the economy. The negative consequences of debt are never a concern.

It must be conforting to live in such a simple universe.

I am more of a sliding scale type person. Each dollar borrowed contributes either positively or negatively at it's idividual marginal level.

It's kind of scary to live in my universe where debt has consequences.

Comparing Ireland and the USA is unreasonable. Ireland made the foolish decision to join the Euro and until it leaves this suicide pact its economic fate is not in its own hands, but in the hands of Empereur Trichet, whose continental power is comparable only to that of Napoleon or Hitler. As I had guessed he would, to maintain his own power, he recently did some money printing (the carrot) to mitigate the effects of the brutal austerity programs (the stick).

Of course, a New Deal style Job Guarantee program (which would mean deficit spending, quelle horreur!) would quickly cure the ills of an economically sovereign state like the USA, but irrational, anti-scientific, anti-empirical economics, like ones that rewrite history Soviet-style to say that the New Deal didn't massively reduce unemployment, is too prevalent for this to happen.

Well, why was unemployment in this country near 20 percent by the end of the decade? Furthermore, are you trying to tell us that all it takes is for government to print money and - Voila! - we have jobs and real income.

I love the "irrational, anti-scientific, anti-empirical" label you put on anyone who is not a True Believer. To be honest, I would say that anyone who thinks that printing money creates net wealth is irrational, anti-scientific AND anti-empirical.

Let me try this from another angle which I'm sure the simpleminded devotees of Austrian ideology will choose to ignore: how come everytime we balance the the budget in this country, a credit bubble occurs? Could it be because public deficits must equal private savings, and when the a surplus occurs, it drains savings. And you seem to think savings are the cure for everything.

Why can't you get basic reserve accounting? My guess is it's too logical, and goes against your ideology, and your ideology must me correct at all times.

PS-rates on government securities still falling....time to fire more teachers in the name of austerity.

Anon, as the dreaded pirate Black Beard asked in a popular children's animation, "Have you gone off the track?"

Gold is simply a self regulating currency and its value is as adjustable as paper. It's just a shiny bit of metal which has a long standing history of usefulness. The people who want to go back to it just have a longer attention span than the last presidential cycle.

Anonymous said: "Why can't you get basic reserve accounting? My guess is it's too logical, and goes against your ideology, and your ideology must me correct at all times."

Anonymous-- it's baffling how clueless you are, but then folks that revere govt are typically clueless lackeys. What do you think those dollars the Fed keeps printing will be worth when the SDR becomes the global currency? It's only a matter of when --not if.

Considering that teachers salaries are paid by local property taxes which are based on property valuations. Property values were pushed up artificially in the bubble, so districts built more schools and hired more teachers than they can afford. So as property values fall to where they should be, schools will have to close and teachers let go.

It's unfortunate but could be avoided if the FED didn't inflate bubble after bubble.

some of the comments on the reuters article are insane --and I quote:"World currency is a requirement for humanity to move forward & for the advancement of modern civilization.The sooner a single world reserve currency is adopted the better for all people of the world – including the U.S.Paranoid resistance to improvements to our progressive society is the biggest sociological challenge for the developed world.Please, stop with the delusional “mark of the beast” nonsense & think for yourself! A more peaceful & prosperous world is knocking at the door for you & your children… are you brave enough to answer?"

are numbers from Wikipedia's New Deal article. The Lebergott numbers inconsistently did not count millions of employed government workers as employed in the 30s, and are not sensible to use for this or most other economic analyses. The correct, Darby numbers show unemployment was in single digits at the end of the decade, better than it is now. The uptick in 1937 came because of foolish budget-balancing worries stalling the New Deal.

My position, supported by common sense, science and history, imho, is that in a depression, if the government prints money to pay someone unemployed to do useful work, like building bridges or performing scientific research, he will have a job, unemployment will go down, and the general economy will begin to recover.

The government jobs SHOULD NOT count because they demonstrate a continuing failure of the market to return to prosperity by producing private sector jobs. Perpetual high unemployment is usually caused by central bank money dilution causing a distortion in the price, investment and capital structure. Taxing and borrowing to build bridges IS NOT going to correct that.

I love it when New Deal supporters point to unemployment finally approaching single digits after 12 years of intervention (FDR merely continued and expanded Hoover's policies) as some kind of smashing success!

Meanwhile, the 1920 contraction was more severe than the 1929-1930, yet the economy was fully recovered in 18 months without any interventions.

I always enjoy hearing them talk around that one.

Anon, why don't you amuse us a little bit and explain how 1920 was so different. It's always fun for me.

i have a quick question:seeing as you have continued to argue that a form of accounting can delete the relationship between the taxpayer and government spending, i was wondering, when you go to magic shows do you believe the magician ACTUALLY made the card disappear?

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).